Analysis & Opinion

WASHINGTON, July 29 (Reuters) - Lockheed Martin Corp
and the Pentagon have reached agreement on orders for the next
two batches of F-35 fighter jets, a deal worth over $7 billion,
a person briefed on the discussions told Reuters on Monday.

The deal covers 71 of the radar-evading planes, with 36 jets
to be purchased in the sixth production lot, and 35 in the
seventh. The total includes 60 F-35s for the U.S. military, and
11 for Australia, Italy, Turkey and Britain.

The agreement is good news for Lockheed, which generates
about 15 percent of its revenues from the F-35 program, and its
key suppliers: Northrop Grumman Corp and Britain's BAE
Systems Plc. At a projected procurement and development
cost of $392 billion, it is the Pentagon's biggest arms program.

The agreement was negotiated without factoring
across-the-board budget cuts imposed on the Pentagon in March,
said the source, who was not authorized to speak publicly.

Lockheed officials last week said the Pentagon was trying to
minimize the impact of the budget cuts on the output quantities
in the seventh batch of low-rate production jets, which is
funded under the fiscal 2013 budget.

A second source familiar with the negotiations said Pentagon
acquisition chief Frank Kendall had approved the broad outlines
of the deal, which includes further reductions in the cost of
the planes from the previous contract.

Neither source had details on the cost per plane.

The government negotiates separately with Pratt & Whitney, a
unit of United Technologies Corp, for the plane's
engines. Those talks are also expected to wrap up soon.

Lockheed is building three models of the F-35 for the U.S.
military and eight international partner countries: Britain,
Australia, Canada, Norway, Turkey, Italy, Denmark and the
Netherlands. Israel and Japan have also ordered the jet.

Lockheed Chief Executive Marillyn Hewson last week cited
good progress in the negotiations and said the company expected
to reach a deal in the near term.

Given the size of the program, Pentagon officials have been
pushing for lower prices to ensure its future, given
mounting budget pressures and mandatory budget cuts that could
slice the Pentagon's budget by $500 billion over the next
decade.

The Pentagon reached agreement with Lockheed on the fifth
batch of F-35s last December, agreeing to buy 32 of the advanced
warplanes for $3.8 billion.

FURLOUGHS TAKE TOLL ON TESTING

Furloughs of civilian defense workers will likely result in
a month-long delay in flight tests of the fighter plane,
according to Joe DellaVedova, a spokesman for the Pentagon's
F-35 program office.

He said the program had caught up with its testing schedule
after two separate flight grounding actions earlier this year,
but he added the furloughs were taking a toll.

Civilian employees affected by the furloughs work on flight
test controls at Edwards Air Force Base in California and
Patuxent Naval Air Station in Maryland, so their absence is
shaving a day per week off the schedule of possible flight
tests.

"We don't know yet what the final impact will be,"
DellaVedova said. "We think we'll be at least a month behind."

He said the program office had planned some flexibility into
the testing schedule for the year, but that had been used up by
the two earlier groundings. "We are working hard to muscle
through as best we can," he said.

The Navy is also resurfacing a runway used by government
officials for "check out flights" when each jet comes off the
assembly line at Lockheed's adjacent Fort Worth, Texas, plant.
The work will close that runway for about a month, said Lockheed
spokesman Michael Rein, beginning on Aug. 1.

The U.S. military is keen to complete flight testing of the
already delayed F-35 program, the Pentagon's largest weapons
program, so that it can begin to use the new jets for military
operations. Other factors, including weather conditions, can
also affect flight testing.

Civilian defense workers across the United States began
taking unpaid leave on July 8 as part of an austerity plan that
is expected to save $1.8 billion through Sept. 30, the end of
the 2013 fiscal year. The furloughs are part of nearly $37
billion in automatic across-the-board budget cuts that hit the
Pentagon this year as part of a process known as sequestration
that is aimed at curbing the U.S. government's nearly
trillion-dollar deficit.